Saturday, 2 February 2013

Gazprom's (and Putin's) business model is losing its shine

The end is near for Gazprom's (and Putin's) business model:

Technological progress is threatening its business model and the company that has long monopolized the market has failed to adjust in time. "Eat or be eaten" has been its general operating principle when it comes to prices. For decades, many countries, including Ukraine, relied on Gazprom for its gas supply, but the market is becoming increasingly global. With the supply of natural gas growing and prices falling, Gazprom is beginning to lose its grip on the market.

Three-Fold Pressure

There are three primary risks that are threatening the country. For one, rivals in the Middle East are constructing facilities for liquefied natural gas (LNG) and developing a fleet of special tankers that will be able to transport LNG to destinations thousands of kilometers away -- further than any pipeline and with far more flexible trade routes. In Europe and Asia, LNG is increasingly competing with Gazprom. Qatar in particular has massively boosted its LNG supply to Europe: In 2011, the emirate exported 44 billion cubic meters, compared to 5 billion cubic meters in 2006.

Secondly, Norway is expanding its gas exploration and wresting market share from Russia in Europe. According to Eurostat, the European Union's statistical authority, Norway's gas sales in Europe rose by 16 percent in 2012, while Gazprom's fell by 8 percent.

And thirdly, thanks to new drilling methods, it has become easier to extract natural gas trapped in permafrost, dense clay and, especially, shale, allowing for gas production in previously untapped regions. In the US particularly, fracking, as it known, has triggered a gas bonanza, making it hard for Russia to get a foothold in the market. Gazprom was aiming to secure 10 percent of the US market, but this goal now seems decidedly out of reach.

The Kremlin is feeling the effects of these developments in the gas market. In coming years, EU countries such as Poland are planning to concentrate on unconventional gas extraction in order to reduce reliance of Russia. With gas and oil accounting for 50 percent of state revenue, a drop in Russian exports will hit Moscow hard. In addition, it will lose leverage over countries such as Poland, Ukraine, Lithuania and other states that used belong to the Soviet sphere of influence. The German intelligence service Bundesnachrichtendienst (BND) predicts that the erstwhile energy giant will soon begin to lose power.

The published version of Bundesnachrichtendienst's analysis does not say it, but it goes without saying that Gazprom's loss of power in reality also means the end of Vladimir Putin's "business model", which is solely based on the easy billions from gas and oil exports flowing into the state coffers. Putin will of course try to cling to power as long as he can, but sooner or later he will share the fate of all other dictators ...